Cash-Out Refinancing

Cash-out refinancing pays off the current loan with a bigger new one, and the borrower walks away with the gap in cash. It is the refinance step of BRRRR: the new loan is sized on the property's appraised value after the rehab, pays off the short-term financing, and returns some or all of the cash invested.

Lenders cap cash-out loans on investment property at 70 to 75% of appraised value, lower than purchase loans, and charge closing costs of 2 to 4% of the new loan. On a $500,000 appraisal at 75%, the loan is $375,000. After paying off a $270,000 hard money loan and $11,250 in costs, $93,750 comes back.

The proceeds are borrowed money, not income, so they are not taxed. They also come with a larger payment, which the rent has to cover. A home equity loan or line of credit is the alternative route to the same equity, usually at a smaller amount and a higher rate, and it leaves the first loan in place.